Proxy Advisory Firms and Stock Option Repricing

This paper examines the relationship between firm performance and the recommendations provided by proxy advisory firms in the United States, regarding shareholder votes in stock option exchange programs. Using a comprehensive sample of stock option exchanges announced between 2004 and 2009, we find that exchange firms following the restrictive policies of proxy advisory firms exhibit statistically lower market reaction at the announcement of this transaction, lower operating performance, and higher executive turnover. These results are consistent with the conclusion that proxy advisory firm recommendations regarding stock option exchanges are not value increasing for shareholders.David Larcker is a co-author of the book Corporate Governance Matters, FT Press 2011.Prior draft date: August 19, 2011Current Draft Date: April 9, 2012